by Jon Baliles
Mayor Levar Stoney reportedly pulled a back muscle two weeks ago from slapping himself on the back after he announced the city received a AAA bond rating from the Fitch Rating Agency. It is the first time the city has ever received the designation, although the other two main rating agencies, S&P Global (with a AA+ rating) and Moody’s (at Aa1), both have Richmond at one step below the vaunted AAA rating.
The AAA rating allows the city to borrow money at the best possible and most favorable interest rate, which is certainly timely because the city is about to issue $170 million to build a baseball stadium ($130 million) and related infrastructure ($40 million).
After two years of pretending the city’s plan for the Diamond District would create a CDA, and the new revenues from that development’s early phases would pay the bond debt service for the stadium, the Mayor did an abrupt about-face in April and announced the city would issues all of the debt to build the stadium and infrastructure, which shifted all the risk to the city. He said it was a risk worth taking.
Stoney said the rating upgrade put the city “among an elite class of localities” in Virginia and across the country “that have proven financial responsibility at the highest level.” Of course, Henrico, Chesterfield, Norfolk, Virginia Beach, and others have a AAA rating from all three rating agencies; so far we have one of three, which is certainly a respectable .333 batting average.
One city official estimated that the city will save about $25 million in interest payments over the 30 year life of ALL current bonds (not just the issuance of the $170 million for the Diamond District bonds). Good credit for a locality is essential; the more responsible you are with financial spending and don’t rely on too much debt and maintain some savings, you improve your rating (think credit score) and get better rates if you need to borrow more.
Chief Administrative Officer (CAO) Lincoln Saunders told the Times-Dispatch that the rating upgrade will allow the city to leverage more funds in case of an economic downturn to keep operations going. “By setting a clear goal for our reserve funds, we have strengthened our financial resilience and positioned ourselves for long-term stability.”
Now, don’t get me wrong, having a AAA rating is important in saving money when borrowing to build capital needs throughout the city – for schools, parks, community centers, infrastructure, etc. (note the keyword there: needs). While the city will be able to borrow for the stadium at more favorable rates, that reserve windfall will leave $170 million less to leverage for capital needs or to maintain critical operations and services in a serious emergency (but let’s be serious; what are the odds of two world-impacting events like a Great Recession or a pandemic occurring within a 12-year span???).
But the amazing thing about the press conference was that the Mayor and others attempted a sleight of hand to get the media and the people to believe that it was the shift to have the city issue the debt instead of requiring developer collateral that was the sudden reason for the rating upgrade. According to Richmond BizSense, Stoney said the AAA rating also “further underscores the positives” of the Diamond District project and validates the change in the financing approach to the project that City Council approved earlier this month.
If that were actually the case, then, Stoney may have stumbled on a new formula for new stadium funding all across America — change your financial plan to publicly assume all debt to build a stadium and your city will also earn you a AAA bond rating and you can build it for less! Why didn’t we think of this before??
However, the Times-Dispatch editorial page threw cold water on the Mayor’s attempted magic trick: “Despite Stoney’s proselytizing, the upgrade from Fitch has nothing to do with the merits of the Diamond District project. The bond rating agencies rate a municipality’s ability to pay, not how the money is actually spent.”
And while Stoney deserves credit for fulfilling a pledge he made in his first term and achieved a AA+ rating in 2020 (the first upgrade since 2014), the back-slapping and muscle-pulling must also be put in perspective. The Mayor and others at the City Hall Observation Deck party thanked the many employees and current and former officials who helped improve our financial position as a city over the last 20 years by using mostly sober-budgeting and slowly building reserves. But some specific names that were not mentioned were former Councilman Parker Agelasto, former CAO Selena Cuffee-Glenn, and former Finance Director Lenora Reid, who had the most significant impact on what the Mayor was patting himself on the back about.
Agelasto, Cuffee-Glenn and Reid pushed for and passed Ord. No. 2017-215 in Stoney’s first year as mayor in 2017, requiring the city to not spend year-end budget surpluses on things only the mayor wanted. Instead, it required the city to put 50% of any surplus towards its rainy day fund, 40% for capital maintenance reserves, and 10% on whatever the mayor and Council decided should be funded (i.e., collaborate). This legislation came about after several years of Mayor Jones perpetually claiming that the city would be in dire straits financially at the end of every fiscal year, and then when a magic surplus appeared, he would spend it on things he wanted to spend it on.
You can read the extensive supporting documentation Agelasto provided on page 7 of the legislation that explains why this was a good long-term fiscal policy to adopt (hint: it wasn’t motivated by a desire to build a big, shiny project). While politics means those in office get to take credit, it may not be surprising to learn that Stoney did not join the six Council members who sponsored this change that was approved 9-0. It has required a level of judicious saving that, had it not been in place, probably would have instead been wasted on pet projects and buying favors.
It is also worth noting that in addition to the impact of the 2017 legislation, over the last twenty years the city and Council and the people were wise enough to not take our eye off of the budget and get behind and dive head first for the big, shiny project and enter into any bond-dependent and treasury-sapping projects like Dwight Jones’ Shockoe stadium or Stoney’s two-year obsession with the Navy Hill boondoggle. If either one of those had been approved, there is no way the city would be thinking about a AAA rating.
John Gerner, a Richmond-based financial consultant who served as vice chairman of the City Council-appointed Navy Hill Development Advisory Commission five years ago told the RT-D, “Don’t think building a baseball stadium improved our bond rating, because that is unlikely the situation. It’s truly unrelated. (Fitch’s rating is) based on the tax base and policies geared toward paying the general obligation bonds. The lesson from this is not, ‘Let’s build more unnecessary projects.’”
The rating upgrade is certainly a good thing, but without getting all three rating agencies to upgrade our status, it will prevent the city from borrowing with the absolute most favorable rates like some other localities, despite the Mayor’s claims. Plus, the large amount of the Diamond District bond issuance (plus the additional debt the new Community Development Authority will issue to build a parking deck) will hurt our ability to achieve those rating upgrades from the other two agencies.
But more importantly, if the development falls short of covering debt service and the city and taxpayers have to pick up a lot of or all of the tab, it will provide a real test for the city’s debt capacity that could limit what we can spend on more essential projects. Some might be delayed, deferred, or deleted entirely from future budgets.
That would certainly not be worthy of a back-slap session or a celebratory press conference.
This column has been republished with permission from RVA 5×5.